The Perfect Storm

It’s very difficult to predict just what’s going to happen to the economy and the stock market going forward. What I know for sure is that investment risk is high, investor sentiment is weak, and just about anything could happen to the Main Street economy.

I also know that a lot of the data to support this view are already factored into current stock prices. So, I think we can look at what’s happening in the stock market and use this as a tool to see what investors are predicting will happen to the economy in the future.

Current trading action suggests that equity investors are expecting things to get worse before they get better.

The technology bubble took its toll on the stock market back in 2000. The market didn’t begin to even turn around until mid-2003. Since then, large-cap stocks have been the clear market leaders and have really outperformed other sectors of the market.

Now, the charts are very clear in illustrating the market’s technical breakdown. Large-cap stocks are leading the downtrend and have been since the credit crunch began last year. In my mind, this significant weakness in large companies provides a compelling argument that the domestic and global economies are in real trouble and that this trouble could last for quite some time.

Even if the price of a barrel of oil wasn’t trading at $145.00, but $100.00 a barrel; I still think that the commodity price cycle would still be taking its toll on large-cap companies. For several years, large companies have been able to absorb higher raw material costs for their products. Now, of course, they can’t do this, because the price increases in many commodities have been so large that profitability is getting hurt.

Furthermore, large companies haven’t been able to pass on their higher input costs to customers because the demand just isn’t there. So, at the end of the day, we have the perfect storm. Throw in the very real threat of inflation, and we’ve got a genuine bear market in stocks.

I think this is something we’re all going to have to get used to.